Mexco Energy Corporation — Form 10-Q Summary
Reporting period: Three months ended June 30, 2011 (the first quarter of fiscal 2012), compared with the three months ended June 30, 2010. The request metadata says “2010 Q1,” but the filing itself reports the 2011 quarter.
Business and financial performance
Mexco explores, develops, and produces oil, natural gas, condensate, and NGLs, with most interests in West Texas and properties in 12 states. Its interests are primarily operated by others.
- Revenue: Total operating revenue was $909,094, up 9% from $836,393. Oil and gas sales rose 9% to $905,340. Oil revenue increased 32.5% to $443,857, reflecting higher prices and slightly higher volume; gas revenue fell 7.1% to $461,483 as lower volume more than offset a modest price increase.
- Profit and margins: Net income was $104,385 ($0.05 per diluted share), versus $5,776 (reported as $0.00 per share). Operating income was $156,680, compared with an operating loss of $39,898. Operating margin was approximately 17.2%, versus negative 4.8%; net margin was approximately 11.5%, versus 0.7%.
- Costs: Production expense declined 38% to $227,902, primarily because the prior-year quarter included workover and repair costs. DD&A fell 3% to $245,174. General and administrative expense rose 9% to $270,300, mainly due to higher stock-based compensation. Interest expense increased to $10,919 from $3,339.
- Cash flow: Operating cash flow was $383,152, down 14% from $444,942. Oil and gas property additions were $122,614; proceeds from property sales were $462,608; and debt repayments were $850,000. Cash declined $55,558 to $123,513.
- Liquidity and debt: Working capital was $391,335, down from $470,253 at March 31, 2011, mainly because accounts payable and accrued expenses increased. Long-term debt was $950,000, down from $1.8 million. The $4.9 million revolving facility had $3.95 million reported available; it matures November 30, 2012, bears interest at floating BBA LIBOR plus 2.50 percentage points (2.69% at quarter-end), and prohibits cash dividends. The company reported covenant compliance.
- Balance sheet: Total assets were $15.37 million and stockholders’ equity was $12.71 million at June 30, 2011. The asset retirement obligation was $591,667 in total, including a $50,000 current portion.
Changes, outlook, and risks
- Management attributed the increase in net income to higher revenue and lower production costs, partly offset by a swing from a tax benefit to tax expense. The quarter’s income tax expense was $41,377, versus a $49,009 benefit in the prior-year quarter.
- In June, Mexco received $450,000 for assigning a five-year leasehold interest in 200 acres, retaining an 8.33% royalty. The company also described drilling and infill-well participation, including planned drilling at Fuhrman-Mascho and proposed wells at the Dodd-Federal Unit.
- Management said cash from operations and financing should provide adequate liquidity for the next fiscal year. No specific earnings, production, or capital-spending guidance was provided. The company’s stated strategy is to pursue reserves with low operating costs, particularly gas properties and royalties.
- Commodity prices are the principal risk; Mexco had no oil or gas hedges. Management noted that lower prices could reduce cash flow, reserves, borrowing-base capacity, and property values, and could trigger a full-cost accounting write-down. The company is more sensitive to gas prices: a $1/Mcf price change would have changed quarterly pretax income by approximately $108,347, versus $4,560 for a $1/bbl oil-price change.
- Other disclosed exposures include floating-rate debt and purchaser/working-interest-partner credit risk. The company reported no significant credit losses, no material changes to previously disclosed risk factors, and no material litigation known to it. Management reported effective disclosure controls and no material control changes during the quarter.
Important facts for investors to verify
- Confirm the period: this filing covers the quarter ended June 30, 2011, notwithstanding the “2010 Q1” request metadata.
- Review the sustainability of the earnings improvement, especially the lower production costs, commodity-price effects, and tax provision.
- Verify cash availability and facility terms, including the reported $3.95 million availability, covenant compliance, collateral, and November 2012 maturity.
- Assess the production, reserve, and capital-return prospects of the lease assignment and drilling projects; the filing does not provide a clear quantified forecast of their expected contribution.